Turning over assets is essential to keep a product-focused business running, as it results from effective sales strategies and results in greater revenue. Turning over assets at different rates can have different impacts on your profit margin, and your profit margin can affect your asset turnover rate at the same time. Pricing strategies, demand for products, operational efficiencies and inventory cost structures can all influence the balance between asset turnover and profit margins. Understanding how turning over assets affects profit margins can help you to design your pricing and sales strategies to maximize your company's profitability.

Asset Turnover Formula

The asset turnover ratio provides a standard measure to gauge how efficient an organization is at turning over its assets. Using a standard ratio can allow you to accurately compare your current turnover trends with previous trends, revealing how well you are improving operational efficiency and boosting sales over time. A standard ratio also allows you to compare your own data with that of competitors and industry averages to more accurately gauge your competitive advantage. Use the following formula to calculate the asset turnover ratio: Asset Turnover Ratio = Revenue / Assets

Profit Margin Formula

A profit margin represents the relationship of net income to total revenue as a ratio, revealing the percentage of total revenue that counts as profit. Use the following formula to calculate a profit margin: Profit Margin = Net Income / Total Revenue

Interpreting The Correlation

The price elasticity of demand is the key to understanding the major correlation between asset turnover and profit margin. At lower prices, demand tends to rise, which in turn can increase sales. When sales increase, assets turn over more rapidly, resulting in greater revenue. However, even though revenue can be high with this type of high-volume pricing strategy, the lower prices serve to reduce overall profit margins. A high-end pricing strategy tends to have the opposite effect. At higher prices, demand decreases, resulting in fewer sales and potentially lower revenue. However, this kind of low-volume strategy can result in higher profit margins for each unit sold.

Inventory Turnover

Inventory sales represent the bulk of the asset turnover ratio in a wide range of industries. Productive or capital assets such as facilities, equipment and patents are generally not included, unless selling these things is a company's principal line of business. Inventory turnover trends can have additional impacts on profit margins, based on their close connection with operational efficiency. Boosting inventory turnover can serve to lower storage costs, because less warehouse space is needed if inventory is not sitting on hand for longer periods of time. Keeping less inventory on hand for shorter periods can also reduce the impacts of spoilage, waste, damage and theft. All of this can serve to boost the gross profitability of inventory sales by reducing unnecessary expenses, which in turn can affect a bottom-line profit margin.

Financial Asset Turnover

Inventory is not the only asset that can be routinely turned over. Some companies use financial investments such as stocks, bonds and currencies the same way others use physical inventory, purchasing them specifically for short- or medium-term resale. Increasing financial asset turnover can directly affect profitability by increasing the amount of capital that investment managers have available to purchase new assets. With inventory turnover, the revenue received from each unit of the same type of inventory is generally constant. With securities, on the other hand, the ratio of income to expenses for each asset can vary widely. Since the total revenue of each financial investment varies, increasing the volume of investment turnover can increase the probability of achieving a higher total profit margin.

About the Author

David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.